By Max Sato
(MaceNews) – Bank of Japan policy board members argued that the central bank must capture the underlying trend in consumer inflation, with a focus on slow wage hikes, even though its annual rate may come close to the bank’s 2% target temporarily as energy and commodities prices rise and the base effects of sharp discounts on mobile phone charges wane, according to the minutes of the bank’s Jan. 17-18 meeting released Wednesday.
“One member pointed out that, from April 2022 onward, the year-on-year rate of change in the CPI might momentarily rise to a level close to 2 percent if the effects of the reduction in mobile phone charges dissipated and other factors simultaneously contributed to pushing up the CPI,” the minutes said.
“The member then said that, thereafter, it would become important to analyze what lay behind this inflation and whether it would turn out to be sustainable.”
A different member said that there was a possibility that the year-on-year rate of change in the CPI would reach around 1.5 percent temporarily in the first half of 2022.
However, the member added that “whether the rate thereafter would come close to the price stability target of 2 percent and stay at that level with the inflation momentum being maintained depended on developments in wage inflation and medium- to long-term inflation expectations, and moreover the strength in demand that determines such developments.”
On a positive note, one member projected inflationary pressure would increase, as the pandemic would likely prompt many firms to acknowledge the limitation of their “low-margin, high-turnover” business models – which had been effective during the deflationary period – and change their price-setting behavior.
Noting that the stock prices of firms announcing price hikes had tended to rise recently, a different member said that, in the current situation where the markets were paying attention to firms’ ability to raise prices, there was a possibility that such moves to raise prices would spread further, leading to a rise in medium- to long-term inflation expectations.
“Meanwhile, one member commented that, although changes had been observed in firms’ price-setting behavior and inflation expectations, achieving the price stability target by the end of fiscal 2023 was difficult given developments in the output gap and inflation expectations.”
Many members expressed the recognition that, with the pass-through of raw material cost increases expected to continue, it had become “increasingly important” to examine the underlying trend in consumer prices, and from this perspective, they were “closely monitoring developments in wages, which determine a large part of services prices and affect households’ tolerance of price rises,” the minutes said.
“Based on this discussion, members agreed that, compared with the previous
projections in the October 2021 Outlook Report, the baseline scenario of the outlook for prices for fiscal 2022 was somewhat higher, mainly reflecting the rise in commodity prices and the pass-through of that rise to consumer prices.”
At the January meeting, the bank decided to maintain its interest rate targets and main asset purchase program to continue supporting economic recovery and guiding gradually rising inflation toward its 2% target.
In its quarterly Outlook Report released on Jan. 18, the bank noted that the pickup in the Japanese economy “has become evident” as the drag from the pandemic on global and domestic growth “has waned gradually.” This marks an improvement from its October report and December policy statement that the economy “has picked up as a trend.”
At its latest meeting on March 17-18, the bank decided to maintain its interest rate targets and main asset purchase program but warned that there are “extremely high uncertainties” over how the war in Ukraine will affect Japan through developments in global markets, prices and other economies.
The BOJ revised down its view slightly to say Japan’s economy “has picked up as a trend” with some weakness caused by Covid-19, a change from language in its January Outlook Report when it had said, “A pick-up in Japan’s economy has become evident as the impact of Covid-19 at home and abroad has waned gradually.”